Obama’s smart $8-billion jolt for electric cars

July 14, 2009

I’m trying something different this week on the blog, in part because I’m on vacation. Recently, I had the great pleasure of attending a retreat for journalists organized by the Murray Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis. The event was held on Cape Cod, at the lovely Wianno Club in Osterville, Mass., and while time was set aside for golf, tennis or sightseeing, we engaged in a lot of learning, discussion and debate with economists and political scientists from the Weidenbaum Center and elsewhere.

Today’s blogpost explains why Steve Fazzari thinks this is a good idea. Tomorrow, we’ll hear from Russ, is pretty sure that it isn’t.

Cape Cod sky photographed by Russ Roberts

Ask Steve Fazzari what he thinks about the government loan program for electric and fuel-efficient cars, and he says:

From my perspective, there are two issues here. First, do we need “stimulus” in the general sense because the private sector is not operating at a high enough level to fully employ the country’s resources? Second, is this a good way to direct some of that stimulus? I would answer yes to both questions.

Like virtually all serious economists, Fazzari is a strong believer in markets. But he says, and it’s hard to argue with him, that markets are not operating well right now. Unemployment is approaching 10 percent. Many factories are underutilized. And while the worse of the credit crunch is behind us, it’s still extremely hard for businesses to get loans. “There is strong evidence that businesses cannot get loans or raise new equity for investment projects that they believe will be profitable,” he says.

In that context, this is the perfect time for government to stimulate the economy either through fiscal policy (more spending, like Obama’s $787-billion stimulus package), tax cuts (part of the stimulus and the Bush package of 2008), monetary policy (cheaper interest rates, already in effect) and other actions, like these DOE loans, which are designed in part to put people back to work.

This is traditional Keynesian thinking. (“Priming the pump” is the phrase that comes to my mind from a long-forgotten econ class.) Government spending, or in this case these loans, generates economic activity that will ripple through the economy. We talked a lot during the retreat about the “multiplier effect.”

“If you create income that otherwise wouldn’t be there, then that factory worker or research scientist or secretary or maintenance person who otherwise wouldn’t be employed—they are now going to go to the grocery store, or buy a new car, or maybe even build a new house,” Fazzari says. Makes sense to me. Lately, some economists and commentators have called for a new stimulus package because the economy has been so sluggish. See, for example, Bob Herbert’s column in Saturday’s Times.

As for the DOE loans to the automakers to produce electric or fuel-efficient cars (which we’ll delve deeper into tomorrow), Fazzari says they create compelling environmental benefits. Carbon emissions that cause global warming are a classic example of what economists call an externality, or a cost not captured by market transactions. “When I drive to work, I put CO2 into the atmosphere,” Fazzari says. “The externality has an impact on everyone on the globe. We know we have a market failure.”

One way to correct for this, of course, is to tax fossil fuels or set up a cap-and-trade system to regulate GHG emissions, as the Waxman-Market bill passed by the House does. An alternative approach is to use the government’s power to stimulate low-carbon technology, as the administration has been doing so aggressively.

Says Fazzari: “There are social benefits of carbon-reducing technologies that are not captured by the market…. So we can subsidize the technologies that reduce carbon.”

I raised two objections to this Keynesian approach, and Fazzari’s responses to both surprised me. First, I argued that stimulus spending or loans that could carry risk, and therefore might default, generate ever increasing government deficits and amount to borrowing from our children and grandchildren to pay for our needs. “Intergenerational transfers,” in the argot of economists.

Fazzari replied that, yes, we are transferring the debt to the future but we are also transferring the asset, i.e., the government bond that will have to be repaid somewhere down the line. “Future generations will get the proceeds, the principal and interest paid on the bonds,” he says. He quickly added that these transfers could have distributional effects–i.e., richer people (or Chinese people) are likely to be holding the bonds, while ordinary taxpayers are left with the debt–but that’s different from saying that we are leaving future generations only with our debt. He also made the more conventional argument that smart spending today could generate long-term benefits, in the form of a cleaner environment or, for that matter, public works like those built during the Depression that we are still enjoying. Check out the bridge below that I often pass when running in Rock Creek Park in Washington.

Finally, I asked Fazzari how much confidence he had that the energy department was picking the right automakers for the $8 billion in loans. The DOE news release says the government will loan

$5.9 billion for Ford Motor Company to transform factories across Illinois, Kentucky, Michigan, Missouri, and Ohio to produce 13 more fuel efficient models; $1.6 billion to Nissan North America, Inc. to retool their Smyrna, Tennessee factory to build advanced electric automobiles and to build an advanced battery manufacturing facility; and $465 million to Tesla Motors to manufacture electric drive trains and electric vehicles in California.

So why Ford, Nissan and Tesla, rather than Honda and Fisker? As I’ve argued before, markets are better than governments at picking winners and losers. Fazzari surprised me by saying that maybe the government shouldn’t. Instead, he suggested, the government might auction the loans–thereby giving them to the automaker most willing to pay for help, and therefore most confident that its technology will produce real results. That’s an interesting and appealing idea.

You can listen to a podcast of my conversation with Steve Fazzari at The Energy Collective, where I’m a member of the blogger board. That’s Steve and me, below, relaxing after a long day of economic theorizing!

Comments

While we’re discussing Obama’s Smart $8-billion jolt for electric cars | Marc Gunther, Allowing your car to idle for long periods of time, like while you’re waiting for someone or warming up your vehicle during the cold winter months, not only wastes fuel, but also reduces the overall lifespan of your vehicle.